From the beginning of last year to July, the Fed partially unwound the $4.5 trillion portfolio of bonds it had amassed in the years following the financial crisis. The reduction drained cash reserves from the banking system.
This week’s turmoil raised questions about whether the Fed went too far in removing cash from the financial system, and focused attention on when the central bank would begin resuming balance-sheet expansion to keep pace with the needs of a growing economy.
“We’re going to be very closely monitoring market developments and assessing their implications for the appropriate level of reserves and we’re going to be assessing, you know, the question of when it will be appropriate to resume the organic growth of our balance sheet,” Fed Chair Jerome Powell told reporters Wednesday after the central bank cut interest rates for a second time this year.
“It is certainly possible that we will need to resume the organic growth of the balance sheet earlier than we thought,” Powell said.
This article was provided by Bloomberg News.